On January 1, 2018, ABC & Co. issues convertible bonds with a maturity of 5 years. The par value of the bonds is $400,000, the coupon rate is 6%, and the compounding period is semi-annual with interest paid on June 30^th and December 31^st. The market prices these bonds using an interest rate (effective rate) of 4% compounded semi-annually. Each $1,000 bond is convertible to 100 shares of ABC & Co. common stock.

1. On July 1, 2018, the company has excess cash and buys back one-half of the bonds. The market interest rate on July 1, 2018 is 8% compounded semi-annually. Prepare the journal entry for the early extinguishment of one-half of the bonds on July 1, 2018.

2.On January 1, 2019, the bondholders exercised their conversion option on the one-half of the bonds still outstanding. The market price of ABC & Co. shares is $12. Prepare the journal entry for the conversion of one-half of the bonds on January 1, 2019 both the book value method and the market value method.